F5 Networks, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Dollar figures are in millions unless otherwise noted. F5 provides application delivery, security, and performance products and services across hardware, software, cloud, and managed-service offerings.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Revenue | $544.9 | $533.3 | $1,088.7 | $1,056.5 |
| Gross profit / gross margin | $456.7 / 83.8% | $443.7 / 83.2% | $913.8 / 83.9% | $879.5 / 83.2% |
| Operating income / margin | $142.8 / 26.2% | $143.4 / 26.9% | $301.0 / 27.7% | $285.4 / 27.0% |
| Net income | $116.1 | $109.6 | $247.0 | $198.1 |
| Diluted EPS | $1.93 | $1.77 | $4.09 | $3.18 |
- Q2 revenue increased 2.2% year over year; product revenue was nearly flat at $237.9 million, while services revenue rose 3.8% to $307.0 million. Management attributed service growth mainly to maintenance purchases and renewals from a larger installed base.
- For the six-month period, revenue grew 3.0%; products increased 1.5% and services 4.3%. Services represented 56.7% of six-month revenue.
- Q2 gross margin improved to 83.8%, but operating margin declined to 26.2% as operating expenses rose 4.5% to $313.9 million. R&D increased 5.8% and G&A 18.8%; G&A included $3.5 million of NGINX acquisition-related consulting costs.
- Q2 net income rose 5.9%, helped by higher other income and a lower tax provision, despite slightly lower operating income. The effective tax rate was 22.7% for the quarter and 21.7% for six months, versus 25.0% and 31.8% in the comparable prior-year periods.
Cash, liquidity, and balance sheet
- At March 31, 2019, cash and cash equivalents were $726.7 million, short-term investments $587.1 million, and long-term investments $301.4 million, totaling $1.615 billion. Management reported no long-term debt.
- Current assets were $1.807 billion and current liabilities $1.075 billion. Current and long-term deferred revenue totaled $1.161 billion, up from $1.015 billion at September 30, 2018; management cited maintenance contracts as a key driver. Q2 days sales outstanding were 53.
- Six-month operating cash flow was $391.4 million, compared with $374.7 million a year earlier. Investing activities provided $93.0 million, primarily reflecting investment maturities, while capital expenditures were $50.1 million. Financing used $182.1 million, including $201.0 million of share repurchases.
- Cash, cash equivalents, and investments increased $164.5 million from September 30, 2018. Management believes available liquidity and operating cash generation will cover operating requirements for at least the next 12 months.
Material changes, outlook, and risks
- F5 agreed to acquire NGINX for approximately $670 million enterprise value, subject to adjustments; closing was expected later in the second calendar quarter of 2019. F5 suspended its share repurchase program in connection with the acquisition. It had repurchased 1.186 million shares for $201.0 million during the six months and had $1.4 billion remaining under authorization at March 31.
- F5 adopted ASC 606 on October 1, 2018 using the modified retrospective method. Adoption increased opening retained earnings by $36.0 million, primarily from capitalized contract acquisition costs; the reported income-statement and cash-flow effects for the quarter and six months were immaterial. Remaining performance obligations were $1.161 billion, with expected recognition of $525.0 million in 2019, $402.0 million in 2020, and $234.4 million thereafter.
- No specific numerical revenue or earnings guidance is provided in the supplied filing text. Management cited continued investment in facilities and IT, potential strategic acquisitions or investments, and operating cash flow as the primary cash-flow driver.
- Revenue is concentrated among distributors: Ingram Micro represented 20.0% of Q2 revenue; Arrow ECS 10.3%. F5 also depends on contract manufacturers and forecast-based component purchasing commitments.
- F5 described interest-rate and credit exposure in its fixed-income investment portfolio. It reported $35.2 million of unrecognized tax benefits and ongoing tax audits. The Radware patent case was scheduled for trial in February 2020; management could not determine the ultimate outcome or potential exposure and recorded no litigation accrual. The filing reported no material changes to previously disclosed risk factors.
- Goodwill was $556.0 million; the fiscal 2019 annual quantitative impairment test found no impairment. F5 expected adoption of the lease standard in fiscal Q1 2020 to materially affect its balance sheet through recognition of lease assets and liabilities.
Important facts for investors to verify
- Whether the NGINX acquisition closed on the expected timetable, its final purchase consideration, and its effect on liquidity and results.
- Whether service-led growth can offset nearly flat product revenue, and whether operating-margin pressure continues.
- Trends in deferred revenue, remaining performance obligations, and contract acquisition-cost amortization under ASC 606.
- Distributor concentration and the impact of suspending or resuming share repurchases on cash and share count.
- Developments in the Radware litigation, tax audits, and the expected balance-sheet effect of lease-standard adoption.